Article from Patrick Salis CEO of AUSIEX in First Links Australia investment newsletter on the ‘baby boomer bubble’ ending and how demographics are changing, including investment and superannuation advice now needing to focus upon Generation X and Millennials.
As part of his analysis he gives a good overview of past and present demographics in Australia, following are the major excerpts and takeaways.
‘The Baby Boomer bubble is over, what’s next?
The intergenerational transfer of wealth in this country is picking up pace. COVID has seen many older people reassess what they want going forward, a big part of which is determining how to provide for the next generation.
Put simply, we’re at the end of the Boomer phase and the beginning of the Millennial/Gen Z phase. The wealth management industry will deal with the Boomers retiring, the transition of Gen X to being the elders of the workforce, and the rise of the Millennials/Gen Z. The way it will do this is to change its products and services, and in today’s digitised world that means primarily through changes in technology.
The generations
While marketers, media and politicians love to talk about ‘Baby Boomers’ and ‘Millennials’ using arbitrary windows of time, it is important to remember that lives are bigger than categories and we can be prone to over generalisation.
That said, ‘generations’ are a useful tool for analysis. This paper uses the definition provided by Australian Bureau of Statistics shown in table 1.
Source: ABS
The defining characteristic of the table is the commencement of the reconstruction era that started in 1946 after the end of World War 2. From that point, the Boomer generation is generally accepted to be a 20-year generational period, and then each generation is a subsequent 15-year generational period.
The best way to understand why the Baby Boomer generation has been so consequential is to look at the total fertility rate in Table 1.
The over-representation of one demographic cohort has been characterised as a “bubble” in the population numbers, which is why the “Baby Boomer bubble” has been a constant fixture in discussions about generations and their needs and wants. It’s fair to say that the Baby Boomer bubble has been the defining force that has cleared all before it, and its members have also collected resources and wealth as the systems changed to accommodate them and their looming retirement and aged care. And for good reason too, as up until now the Baby Boomers have been the largest and most consequential demographic cohort in Australia since the post war era started.
The boom required more resources such as larger houses, schools, hospitals and cars, the economy expanded rapidly as it consumed to catch up to the needs of the new generation, and the infrastructure of the country grew to support it. Then as the Boomers grew up, they needed education resulting in an expansion of the university system. As they then moved into work, the workplace had to accommodate a workforce that was not just larger from population growth but was also larger because the post war era embraced feminism and women’s rights meaning that women were also available for work.
On the cusp of intergenerational change
The Baby Boomer bubble is starting to deflate before our very eyes.
Table 2 shows the percentage of each cohort that will be of working age during our 5 years planning horizon and Figure 2 shows the same data for only the Gen Z and Boomer cohort.
Within 5 years, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated out of the workforce by 2028. And it doesn’t stop there.
In 2029 the first of the Baby Boomers will reach their statistical age of death (Men 81, Women 85) which means that the Baby Boomer bubble will start to deflate completely.
The impact of this on the wealth management industry is three-fold:
- Baby Boomer superannuation balances will start to deflate out of the superannuation system through retirement consumption, followed by disbursement through the inheritance process.
- Gen X are now the group preparing for retirement and they will become the large balance superannuation account holders.
- With Gen Z fully deployed into the workforce, the predominant demographic groups needing to be serviced by the industry will be Millennials/Gen Z.
Source: ABS
Source: AIHW
Financial flow changes
The exit of the Boomers from the workforce means that for the first time in its history, the retirement system is going to see retirement phase withdrawals from its largest accounts, as those in the 60-64 age group have an average balance of $323,000 compared to the younger generations where those in the 30-34 age group have an average balance of $45,000.
While it is difficult to predict the future and how the money will flow from where, to whom, and where it will end up, we can make inferences based on what we see in the superannuation balance and housing data that we know today. If we start with superannuation balances, we find that the facts don’t really match the prevailing narrative, that super is an inheritance tax planning device.
Research from The Association of Superannuation Funds in Australian (ASFA) shows that while it is true that there are some large accounts, Australian Tax Office (ATO) data in 2018-19 showed that there were only 322,200 accounts with balances above $1 million. This number will have increased given investment returns since that time, however the system favoured the older participants as they had the benefit of a period when contribution limits were not as restrictive as they are for today’s participants, and so the younger generations are less likely to be able to accumulate such large balances, in inflation adjusted terms. Regardless, these accounts are outliers that can be ignored when looking at the mechanics of the system given that the total number of superannuation accounts is 23.3 million….
Cultural changes
It is important to note that as the Baby Boomers are leaving the workforce, the values and motivations of their generation are also leaving with them. It also follows then that the values of the new Millennial and Gen Z generations are going to ascend. It’s a clear generalisation, but no one would be surprised if I said that Boomers expected work environments and those who worked for them to be rigid and hierarchical and social life to be kept separate from work, while Gen Z expects work environments to be fluid and better accommodate their lifestyles and they will blend social and online lives into their work. This alone is a significant cultural change, yet it is added to an environment where the new generations live in an economic world that is far different and more challenging than what the Boomers experienced. Consider the following issues that we can see already.
Baby Boomers exiting the economy creates significant costs for the remaining generations as they stop providing free services such as family-based childcare, and they also require increased medical care. As an example, while accounting for only 21% of the adult population, half of Baby Boomers have a long-term health condition which accounts for 34% of all adults in the population that have a long-term health condition. These are costs that will need to be paid for by the younger generations…..
We have a new generation entering the system that has low expectations of being able to build wealth, strong indicators that suggest that it is indeed true that they have lower economic prospects, and they are also disengaged. This indicates that there will be a considerable cultural shift in how and why the younger generations engage with the wealth management industry, and how the industry attempts to engage with them.
Patrick Salis is the CEO of AUSIEX.
For related topics and blogs on Ageing Democracy, Australian Politics, Demography, Economics, Finance, Government Budgets, Pensions, Taxation & Younger Generations click through:
Global Population Decline and Impacts
Population Pyramids, Economics, Ageing, Pensions, Demography and Misunderstanding Data Sets
Population Decline and Effects on Taxation, Benefits, Economy and Society
Pension Systems and Budget Sustainability
Japan – Australia: Ageing Populations – Demographic Socio Political Comparison
EU & Anglosphere – Refugees – Border Walls vs. Working Age Decline
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